How Do I Start Building Business Credit with an EIN?
Building business credit is very important if you ever want to take out loans or lines of credit to fund future growth. However, building business credit takes time and a few key elements. One of the most crucial is an EIN; without it, you won’t be able to establish business credit. The good news is that obtaining one is free and easy through the Internal Revenue Service (IRS). Let’s get started learning how to start business credit with an EIN.
What is an EIN?
An Employer Identification Number (EIN), or Federal Employer Identification Number (FEIN), is a nine-digit number the IRS assigns to your business for tax and other purposes. Your EIN identifies you to the IRS when filing different types of taxes (payroll, income, etc.). Employers, sole proprietors (with employees), corporations, LLCs, partnerships, nonprofits, trusts, estates, government agencies, certain individuals, and others all use EINs. Although some business structures don’t need an EIN, most have one anyway because of the advantages, such as building business credit. Whenever you contact the IRS, you use your EIN to identify your business, so the correspondence and information are linked to the proper account.
Steps to Building Business Credit with an EIN
Business credit can open the doors to business growth, funding, and support when you need it the most. Building business credit is a slow process, but if you follow the steps below, you will be on the right path.
- Choose the Right Business Structure - The first step when creating a new business is to choose your business structure. There are many types depending on the state where you register your company. Some of the most popular choices are partnerships, LLCs, or corporations. There are also types of corporations to familiarize yourself with. A sole proprietorship is not viewed as its own entity, so that will not work for building business credit. Once you have selected the best legal entity for your business, you need to file the proper documents to form and register your company with the Secretary of State (or similar agency, depending on the state). The rules about registering will vary, so check with your state agency to follow the proper procedure.
- Get Your Personal Credit in Order - As you get your business up and running, do everything you can to ensure that your own personal credit is as good as it can be. Make all payments on time, balance your credit types, don’t take out too much credit, stay clear of bankruptcy and foreclosures, and monitor your credit reports carefully to avoid fraud or misuse. Initially, any banks or lenders may use your personal credit before your business credit accumulates. You will want to have the highest score possible without any blemishes on your credit file.
- Obtain an EIN for Your Business - Obtaining an EIN for your business is relatively quick and easy. You must contact the IRS to get one, and they issue them for free. Once you have it, it will represent your business in all tax and banking matters. See below for instructions on how to obtain one. The fastest way is to apply online through the IRS website, where, in most cases, you can get one instantly.
- Open a Business Bank Account Using Your EIN - The next step in establishing your business credit and making your company an independent entity in the eyes of creditors and credit bureaus is to open a business bank account. You will need your EIN to do this. You must open the account using your company’s legally registered name, address, phone number, and federal tax ID. Now you can keep all your business finances separate from your personal ones. Most banks require an EIN to open a business bank account. Shop around to find a bank that offers you the best services and terms for your company. For the future, your business bank account will be a solid stepping stone to securing credit.
- Establish Credit with Vendors Who Report - When finding vendors, select those that report to credit bureaus. Apply for net terms with these suppliers, and as you buy supplies or inventory, these purchases will get reported and show up on your business credit report. As you add more reporting vendors, you start to establish business credit and a rating. Trade references can help when you need funding or loans later.
- Register Your Business for a DUNS Number - Dun & Bradstreet is the top business credit bureau. It uses the Data Universal Numbering System (DUNS) to identify and categorize businesses. If you do any business with government agencies or apply for grants and loans, you will need a DUNS number. Other types of contracts also require one. All business credit reporting agencies use your EIN or DUNS number to identify your company’s credit history, debts, payments, and score. A DUNS number is free to obtain; apply through the Dun & Bradstreet website.
- Pay All Your Creditors on Time or Even Better, Early - The best way to establish good credit is to pay all your creditors, even those who do not report to credit bureaus on time, or even better, early. The suppliers who do report will note the date of payment, and Dun & Bradstreet uses a PAYDEX score from 1 to 100, with 100 being the best score. This score indicates how well you pay your financial obligations. Even if you cannot pay early every month, do so as often as possible to earn that 100 rating. It will come in handy when you apply for loans or financing.
- Apply for a Business Credit Card - Business credit shows the world how well you can pay your debts in full and on time. One of the best tools to do this is a business credit card. Shop around for the best business credit card deal and then make small purchases at first and pay each bill in full at the end of the month. This will establish a payment history for you. Keep the balance on this credit card low (less than 30% of the available credit limit). Keep making regular on-time payments. When researching card options, be sure to review them carefully. Some credit cards are linked to your personal credit instead of your business. AMEX has a reputation for being a valid business credit card, linked to the business rather than the individual.
- Monitor Your Credit Reports - To be sure your business credit is building and shows accurate information, monitor your credit reports regularly. You are entitled to a free copy each year through the major credit bureaus (below). Carefully review each item and bring any discrepancies to the bureau’s attention immediately to correct them. The major business credit bureaus are:
Identity theft is on the rise; monitor your credit reports regularly to avoid fraud and other financial crimes.
How to Obtain an EIN
Since most business structures do require an EIN, you should apply for one after registering your company with the Secretary of State. Obtaining an EIN is a relatively simple process. Additionally, applying for an EIN is free; no fees are required.
Obtaining an EIN is easy, and you can use two methods to do so. They are as follows:
- By Mail
Visit the IRS website and download Form SS-4 and print it out. Complete the form with all the information required (see below). Alternatively, you can mail the form to the IRS using the address printed on the form. You may have to wait a bit longer for your EIN to arrive by mail.
- Online Application
You may also choose to submit your application to the IRS digitally. Visit the IRS website and fill out all the fields. Once you have completed and submitted the online application, you will immediately receive your new EIN after the IRS validates the information. Validation takes place during the application process. Once complete, you can download and print your confirmation letter, which includes your EIN.
- By Fax
Visit the IRS website and download form Form SS-4 print it out, and complete it with all the necessary information (see below). Fax your completed form to the number listed on there. If you use fax, the IRS will fax you back a confirmation letter with your new EIN within four business days.
The online application option is by far the fastest way to get your EIN. Fax is the second quickest option, and if you apply by mail, you may have to wait up to four weeks to receive your confirmation letter with your EIN.
What Information is Required for an EIN?
When applying for an EIN/FEIN, you must provide the IRS with detailed and specific information about yourself and your business. Those details are as follows:
- The legal name of your business. If you have registered the sole proprietorship under your name, then you will use that. If you have a trade name, “Doing Business As (DBA)” name, you must include that as well.
- Your business’s legal address, including state and country.
- Your name and tax ID (SSN). As a sole proprietorship, you will have the authority to control and manage the business, funds, and all assets.
- The type of entity (corporation, LLC, sole proprietorship, partnership) and the date you started the business.
- Does your business involve gambling, and do you sell alcohol, tobacco, or firearms?
- You must provide the reason you are applying for an EIN. Some examples are acquiring an existing business, starting a new business, or hiring employees.
- The highest number of employees you expect to hire within the next 12 months. You must also designate when you will pay employment taxes (annually or quarterly) and the first date you paid wages to your staff.
Along with the information above, you must also identify your business type from the list of industries below. Use your best guess if nothing matches up perfectly.
- Accommodation & food service
- Construction
- Manufacturing
- Finance & Insurance
- Healthcare & social assistance
- Retail
- Real estate
- Rental & leasing
- Transportation & warehousing
- Wholesale-agent/broker or Wholesale-other
- Other
FAQs
Yes. You can get a business credit card using only your Employer Identification Number (EIN). Your EIN is your business’s unique identifier, similar to a Social Security Number (SSN) for individuals. As long as you apply for the credit card using your EIN and not your SSN, the account will be linked to your business and begin establishing credit for you.
Regardless of whether you start an LLC, a corporation, or a partnership, your credit score will begin at zero. The score is not tied to the entity structure. Because the company is brand new, it has no credit history, so you must begin to develop one from scratch. Business credit is built over time by taking out loans, applying for credit cards, negotiating terms with vendors, and paying these bills responsibly. Lenders prefer seeing a mix of credit types. Consider lines of credit, credit cards, vendor terms, and other types to satisfy banks when it comes time to request financing.
Yes, you can. However, understand that building credit from the ground up will take time. Some strategies for building business credit include:
- Pay bills on time.
- Monitor credit reports.
- Keep your credit utilization low.
- Communicate with creditors.
- Regularly review financial statements.
- Update information with credit bureaus as needed.
Banks and other financial institutions use EINs to track business customers and report tax information to the IRS. They use Social Security numbers with individuals and EINs with businesses. When a company opens a bank account, the bank requires either an SSN or an EIN, especially if the account earns interest. When applying for business loans, banks use the EIN for tax incentives and credits related to loan interest.
If you obtain your EIN via the online system, you can begin using it as soon as you get it. However, it may take a few days for the government databases to populate, so please wait a little while before distributing it.
Unfortunately, building personal or business credit takes time. It can take up to three years or more to build a strong credit history for your business. Every time you charge something on your credit card and pay it on time, it gets reported to the credit bureaus. Depending on how much credit you take out, use, or pay, it can be quicker. Sometimes you can qualify for loans and business credit opportunities with only a year of credit history under your belt. Research your options.